Sterihealth tips sharp earnings rise

The small end of the market was not spared from yesterday’s brutal sell-down as Greece’s debt problems reverberated across US and European equity markets.

However, the sell-off is likely to draw out some bargain hunting and experts believe this could push more investors towards junior stocks as most of the earnings in the sector are generated locally, which means small caps are further removed from European debt contagion than their larger peers.

This logic didn’t support small caps yesterday as the S&P/ASX Small Ordinaries fell more than 2 per cent in early afternoon trade and the top 200 stock benchmark dipping by a similar percentage. But the fall in the market could be an opportune time to look at junior names with earnings streams relatively immune from the turmoil in Europe.

Sterihealth (STP)

One such stock could be medical waste company
Sterihealth
, which says it is Australia’s largest provider of clinical waste services, particularly for sharps disposal. Management is forecasting an 11.1 per cent lift in earnings before interest, tax, depreciation and amortisation (EBITDA) to $12 million this fiscal year compared with 2008-09 after a 40.2 per cent jump in net profit to $3.1 million for the six months ended December 31.

“This make eight half-year numbers that met or exceeded guidance [and] we have fully integrated all 11 acquisitions the company has done since 2001," said chief executive officer Dan Daniels. “We have installed a big enterprise resource planning [ERP] system and will finish rolling it out over the next few months and will start looking at acquisition again after the successful rollout of the ERP system."

The company has also installed new sterilisation processing plants in NSW and Western Australia and started operations in South Australia this quarter. Sales growth could get a boost from the federal government’s plans to take over funding of state hospitals as this would put more beds into the system.

However, the stock is illiquid as Mr Daniels holds close to 50 per cent. There are also few foreseeable catalysts for the stock until it has fully implemented its ERP system. Sterihealth was trading flat at $1.40 at lunchtime, which is near the bottom of its recent trading range of $1.55 and $1.38.

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Icash Payment Systems (ICP)

Other types of stock to look at in trying times are those likely to experience a catalytic event or inflexion point and Wilson HTM Investment Group believes that
Icash Payment Systems
fits the bill. The automated teller machine (ATM) supplier could be the next
Customers Ltd
in the making, according to Wilson HTM’s institutional adviser, Simon Robinson. Customers is an independent provider of ATM and payment system services that has gained favour recently. Customers is close to nine times the size of Icash, but the gap could close fast.

“The important thing about Icash is that management understands there is considerable risk with trying to penetrate offshore markets, which is Asian focused – Korea and China," said Mr Robinson. “It is pleasing to see [Icash] has de-risked the [business] by partnering with large locally-based multinationals, which provide Icash with immediate sales and traction in the relevant countries. It doesn’t mean that Icash is without risk, but it looks cheap if they can hit their internal targets of selling 600 machines a month."

Based on his estimates, this would generate $20 million worth of EBITDA on an annualised run rate and would put the stock on a very low forward price-to-earnings multiple of about 2.5 times compared to the one-year forecast P/E of more than 12 times for Customers.

However, Icash is likely to continue trading at a discount to Customers until it can overcome a few issues.

First, it needs to show more evidence its Asian expansion is bearing fruit, although it has done well for itself by securing Lotte Group as a partner for its Korean operations. Lotte Group is one of the largest conglomerates in that region. It also needs to build a recurring revenue business model like Customers’. Mr Robinson pointed out that the company was aiming to generate 15 per cent recurring revenue across the group. And lastly, Icash will have to simplify the ownership structure of NeoICP – the Korea manufacturer of Icash’s ATMs and bank office machines. Currently, Icash holds only a 52 per cent stake in NeoICP.

The stock was 0.1¢ lower at 4.9¢ in early-afternoon trade.

Elders (ELD)

Struggling agribusiness company Elders could be on the cusp of an inflection point after its half-year results presentation which caused the stock to rally 3.9 per cent in early trade to $1.08 –making it the third-best performer on the S&P/ASX Small Ordinaries.

Management is forecasting a “substantial lift" in earnings in the current half year because of favourable weather in eastern Australia’s cropping regions and after its net loss for the six months ended March 31 narrowed to $166 million from $329 million in the year-earlier period.

Elders
also posted a sharp improvement in its first-half underlying earnings before interest and tax (EBIT) of $21.3 million, which was more than 13 times what it made in the year-earlier period as gearing fell to 36 per cent from 128 per cent at the start of this fiscal year. However, the company had taken a $167 million writedown that is primarily related to its underperforming forestry business.

Investors must be breathing a sigh of relief as the news reinforces the belief the company has turned the corner. The stock had crashed to under $1 on May 7, a level not seen in at least two decades. Consensus estimates is forecasting a 26 per cent lift in earnings per share for the next financial year to 13.7¢ as revenue climbs close to 9 per cent to $2.8 billion.

While brokers are divided on their outlook for Elders, the stock is trading comfortably below most price targets. The average broker price target on Bloomberg is $1.55, which implies around a 44 per cent upside from its current share price.